Elementary School Spiral: A Cautionary Tale

Vouchers are back in vogue, but higher ed offers us lessons about a K–12 tuition spiral

Twenty-five years ago, education secretary Bill Bennett advanced the idea that government student aid was largely to blame for the steady increases in college tuition. Since then, higher education reformers have been sounding the alarm about the tuition spiral. The public has finally started to pay attention, now that average tuition and fees at private universities have topped $30,000 per year.

Before jumping on board that proposal, though, voucher proponents should hear this cautionary tale from higher education.

Reformers have amassed considerable evidence for Bennett’s now-famous hypothesis in the past quarter-century. College tuition has increased more than 500 percent since 1985, compared with a 121 percent gain in the consumer price index during the same period. At elite schools, the problem is worse. Fifty years ago, the annual cost to attend Harvard was less than $2,500, which is about $19,000 in today’s dollars, according to the Bureau of Labor Statistics. A year at Harvard now costs nearly $60,000, including tuition, room and board, and fees.

The mechanics of college pricing are to blame. As the availability of student aid increases, either via grants or low-interest loans, demand for education increases—particularly at previously unaffordable “elite” institutions. Colleges then raise tuition enough to capture some of that aid. The problem is systemic; even colleges that are not “greedy” will eventually raise tuition to compete with peer institutions and bolster their reputations by hiring more prestigious staff and adding or upgrading facilities. Aid is then increased to “keep up” with tuition hikes, feeding the cycle.

But endless tuition hikes are not a foregone conclusion. Scholarly evidence shows that some types of aid and some segments of higher education seem to be somewhat “immune” to the tuition spiral. In Introducing Bennett Hypothesis 2.0, Andrew Gillen summarizes those findings.

First, he says, “Not all aid is created equal. . . . Aid programs that are restricted to low-income students are less likely to allow colleges to raise their tuition.” Most voucher proposals get this part right. But here again, K–12 reformers can learn from higher education’s mistakes. The federal Pell Grant program, which once served only students in poverty, has now been expanded to middle-class students—mostly due to political pressure. Voucher programs are susceptible to the same problems.

Second, Gillen shows that tuition caps weaken the link between aid and tuition. In the current market, the existence of “free” public education exerts considerable pressure on private schools to hold tuition down. “Free” public education acts as a tuition cap. Allowing parents to take their voucher money outside the child’s traditional neighborhood zone counteracts that tuition cap. If public schools can capture voucher money to then spend on teachers or programs, it will be that much harder for private schools to compete without raising their own tuition. (In reality, any additional funding poured into public schools exacerbates this problem—but that subject is beyond the purview of this article.) Allowing parents and students to choose their public schools would address the problem; giving them additional money to do so would introduce another.

Third, Gillen notes, “Price discrimination allows private colleges to raise tuition in response to aid at an individual level.” But in order for colleges to do this, he explains, they must know each student’s ability to pay. This means that providing colleges with students’ financial background, as the federal government does via the Free Application for Federal Student Aid (FAFSA), will lead to more aid being captured. “Ending [this] counterproductive practice,” Gillen says, “would curtail price discrimination, which would increase the effectiveness of aid in improving affordability.” The lesson here for K–12 is that parents’ financial information, which they will necessarily disclose to government officials in order to qualify for vouchers, should never be shared with private schools.

Ultimately, all schools, whether public or private, want to improve in order to better serve students and to bolster their reputations. The incentive to increase spending in pursuit of that goal is already very strong. Implementing vouchers in the wrong way simply gives schools another avenue to do so. Vouchers advocates should proceed with caution.

THE FREEMAN

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December 2014

Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.